Self-Inflicted Unemployment Scarring and Stigma
Long-term scars of unemployment include higher ex-post displacement and income losses, as well as lower re-employment that increase in occurrence and duration of previous unemployment spells. Human capital explanations assume that its accumulation is valued by the market, but is impaired by non-employment. We retain the former assumption, yet relax the latter by considering continuous investment decisions made by workers across employment statuses, where wages, as well as likelihood and duration of unemployment spells are capital-dependent. We calculate analytically the joint optimal investment by the employed and the unemployed. We calibrate the model using NLSY79 data and identify two dynamically stable steady-state values with a lower one for the unemployed. Circular dynamics follow whereby human capital optimally falls during unemployment spells and increases again upon re-employment. Scarring and stigma are thus self-inflicted, i.e. endogenously induced through decisions made by agents only. A counter-factual exercise allows to gauge and confirm the importance of employment risks hedging in total demand for human capital and that of moral hazard issues in the design of UIB programs. We also show that status-dependent accumulation technology and capital specificity complement, but are not required for scarring and stigma.